The talk of possible recession has been in the air internationally for some time now. And of course, after the September 11 attacks on New York and Washington, the US Government, the IMF and others were quick to seize on this as the excuse for predicting a future downturn, which could then be claimed as the adverse fallout of international terrorism.
 
The truth is of course, that the weakness in the international economy was already well advanced for some time before September 2001. In fact, much of the world economy had actually been experiencing a slowdown or recession for several years before the last quarter of 2001.
 
In fact, the most striking feature of international economic trends during the 1990s was that the US experienced strong growth while most of the other economies in the world system languished. This was essentially because confidence in the US dollar had made American capital markets a haven for the financial investors. This fed a consumption-led boom within the US, and also caused growing current balance of payments deficits for the US economy. The current account deficit of the US reached the record level of $ 450 billion by the end of 2001.
 
These trends made the latter half of the 1990s unique in the history of post-war capitalism or another reason. In the past the country holding the international reserve currency did not face any national budget constraint because it could print money and spend it across the world, since everyone was willing to accept and hold such money. As a result, the government of that country routinely resorted to deficit spending to keep the world economy moving. That is, the US economy played the role of locomotive of world growth by sustaining deficit-financed spending.
 
According to one estimate (published by Morgan Stanley) the growth in US gross domestic product was responsible for about 40 percent of the cumulative increase in world GDP in the five years ending in mid-2000, which is twice America’s share of the global economy. In this period, demand growth in the US was 4.9 per cent per annum compared to 1.8 per cent in the rest of the world. In other words, US economic expansion pulled the rest of the world behind it, at least to some extent.
 
That process ended some time in late 2000. And with the US engine of growth slowing down, it meant that other countries - which had been relying on the huge demand for their exports from the US to keep their own growth rates positive - were adversely affected. This has been immediately evident in terms of world trade. WTO figures suggest that the growth of world trade in volume terms, which was more than 12 per cent in 2000, was only around 2 per cent in 2001. And when this is combined with continued deflation in terms of trading prices in world markets for primary commodities and many manufactured goods, world trade in value terms was stagnant.

Patterns of output growth and prices in the major economies
 
The growth patterns in the major developed industrial countries are crucial indicators of the overall pattern of the international economy.  Chart 1 provides the IMF’s latest estimates and projections of growth of real GDP. It should be noted that these estimates, published in December 2001, are already significantly lower than those published by the IMF just three months earlier. While the IMF has attributed the decline to the September terrorist attacks, it could be argued that the earlier estimates were anyway to optimistic, as many had suggested at the time.
Chart 1 >>
 
Thus the United States economy, which had led in terms of growth rates of more than 4 per cent per annum until 2000, fell to only 1 per cent growth of real GDP in 2001. In fact, other sources suggest even lower growth figures for the US for the past year.  Industrial output in particular has been falling for more than a year.
 
Further, this period of slowing growth has been accompanied by decelerating and now even declining price levels, raising a real threat of deflation for the first time since the Great Depression. Chart 2 gives the IMF estimates of changes in consumer prices, which suggest that inflation slowed down sharply and there was deflation in Japan. But other sources point to stronger tendencies towards deflation even in the US economy. Figures from the US Labour Department indicate that while wholesale prices rose by 0.1 per cent in January 2002, they had fallen a cumulative 2.6 per cent in the year to January, which was in fact the biggest 12-month drop in half a century.
Chart 2 >>

Similarly, the data on industrial capacity, (only 75 per cent in January 2002) a quarter of which went unused in January have been argued to reflect strong productivity growth, but they also raise concerns about the risk of deflation - a vicious cycle of falling prices, profits, production and employment. Business investment in the US fell by nearly 13 per cent in the last quarter of 2001 compared to the previous year, making it the fourth consecutive quarter of falling investment.
 
The European Union was supposed to be recovering from 2000, but the past year’s growth performance was once again lower, suggesting that the earlier growth impetus, such as it was, was not sufficient to raise the dynamism in the European economy. Both the IMF and the OECD estimates suggest a further deterioration in aggregate growth performance of the European Union in the coming year.
 
The Japanese economy is currently in the weakest position of all the major capitalist economies. Clearly this economy is in the grip of a classic deflation, with low output, falling prices and poor expectations leading to declining levels of investment. The Japanese government’s own forecasts show that the economy will not grow at all in the fiscal year starting in April, with unemployment continuing to rise, to nearly 6 per cent.